British banks and insurers have all but abandoned their fight to prevent an anti-monopolies crackdown on one of their most lucrative products.
Most admit privately that the payment protection insurance (PPI) industry, which earns them excess profits estimated at anything between £1 billion and £3 billion a year, is going to be hit severely.
The industry has until Thursday to make submissions to the Office of Fair Trading, a deadline that represents the last chance to abort a planned reference to the Competition Commission.
However, according to Stewart Dickey, a director of the British Bankers’ Association, “the OFT have made it pretty clear their mind is made up”.
A crackdown could affect some of Britain’s biggest blue chips. Aviva, Royal Bank of Scotland, Lloyds TSB and HBOS are the biggest providers by gross written premiums. Barclays and HSBC are also important suppliers, according to research for the OFT by the consultants London Economics.
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Yet smaller rivals could be most vulnerable, according to research by Keefe Bruyette & Woods, the stockbroker. Mark Thomas, an analyst, believes that the Prudential-owned Egg is the most exposed, with PPI providing most of its profits.
The big high street banks each make profits of about £200 million to £250 million from PPI, according to Mr Thomas, but the damage from any clampdown may be reduced because they could be able to offset the pain by fattening margins in related products.
At present profits from PPI offset the poorer returns from the loans that the PPI policies protect. If the banks cannot continue to make wide margins from PPI, they will raise their interest rates on personal loans and credit cards, Mr Thomas predicted. They may also tighten lending criteria, thus reducing bad debts.
Last month, the OFT said that it was minded to refer the industry to the Commission, arguing that consumers were being failed by the industry, which gave them “a poor deal and often less protection than they think”. A final decision will be made early next year, probably in February.
About seven million PPI policies are sold each year, usually alongside personal loans, credit-card deals, mortgages and high-value credit purchases on cars or furniture. Borrowers with PPI get their interest bills paid in the event of a loss of earnings because they fall ill, have an accident or lose their job.
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However, consumer groups, the OFT and the Financial Services Authority (FSA), which has also conducted two investigations into the industry, argue that consumers are badly served by the industry.
Citizens Advice sparked the OFT investigation last year, tabling a “super-complaint” and lambasting the industry in a scathing industry report.
A crackdown by the Competition Commission could take many guises. “There is no magic bullet,” the OFT argues, suggesting that the commission would need to apply several measures in conjunction.
The nuclear option would be to separate the credit sale from the PPI sale. That would force borrowers to seek a different PPI supplier, which would be inconvenient and might deter borrowers from taking out PPI altogether.
Less radical would be to apply a delay to the sale of PPI by lenders. Borrowers would have to be approached at a later date about purchasing PPI.
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Softer measures could include demanding certain information on sales literature, for example warnings spelling out that PPI was not compulsory or comparative price tables.
Tougher sanctions against salespeople found guilty of mis-selling PPI is another option, with the FSA taking a stronger role.
The industry argues that it is already taking steps to give consumers a better deal and to make the sales process more transparent.
According to Mr Dickey, insurance cover is being increased in some cases for the same premiums and providers are making their policies and sales literature clearer.
He also points to reforms in the Consumer Credit Act 2005, which forces borrowers to sign separately for PPI and, in theory, makes them understand that the two purchases are separate.
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Yet short of a very surprising U-turn from the OFT, it looks like too little, too late.